American Express (Amex) is a global payments company, providing charge and credit card products, loans and payment network services to both businesses and individuals. Furthermore they provide travel-related services to consumers and businesses around the world. It is a leader in the inter-related markets of travel, entertainment and credit cards. The company has five operating segments: US Card Services, Global Network & Merchant Services, International Card Services, Global Commercial Card & Services, and Corporate & Other. In contrast to competitors MasterCard and Visa, Amex is a closed-loop network as it both issues cards to consumers and acquires transactions from merchants.
Total electronic payments in the US are forecast by McKinsey to reach $7 trillion by 2018. The driving forces behind this growth are expected to be digital commerce and increased electronic payment acceptance at small merchants. As one of the leading networks in the world, Amex is well positioned to capitalise on this opportunity. Furthermore, McKinsey believe that the total estimated small business spend in the US excluding payrolls is currently $4.4 trillion. With less than 10% of small business transactions using cards, this is a considerable market opportunity for Amex to exploit. We also feel that, given its closed-loop network, Amex has the potential to fully monetising its position of owning a vast amount of data on consumer spending habits.
Amex is a fundamentally attractive name with very appealing earnings per share growth, which has compounded at 13% during the past three years. We believe this growth trend can continue over the long term, with management targeting earnings to compound by 12-15% per annum from 2017 and beyond. Earnings growth is supported by increased operational leverage, the capital strength of Amex and the business investing in long-term growth opportunities. Moreover, Amex has achieved strong revenue growth (2010-2015 CAGR of 6%) in the last five years, as well as sector leading card segment pre-provision profits. We are also encouraged by the most recent stress tests undertaken in the US, where Amex comfortably passed, with a Tier 1 capital ratio 7.8% above the minimum level required. We are attracted to the company’s capital allocation policy of returning cash to shareholders through buy backs and a growing dividend.
We find Amex’s normalised return on equity attractive and believe that it will be at least in line with its historic 8 year average of 26%, supported by solid EPS growth, increasing free cash flow and progressive share repurchases.
Ownership Disclosure: Clime Asset Management (Clime) owns AXP on behalf of various mandates where it acts as an investment manager.
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